Pension Reform in the United Kingdom: Lessons for Canada?

Transcription

1 Presentation at Conference: Retirement Policy Issues in Canada, John Deutsch Institute, Queen s University, October 26, 2007 Pension Reform in the United Kingdom: Lessons for Canada? Richard Disney University of ttingham & Institute for Fiscal Studies Carl Emmerson Institute for Fiscal Studies Gemma Tetlow Institute for Fiscal Studies & University College, London

2 Background UK pension program has much in common with Canada: Multi-pillar public provision Mixture of private provision (employer-provided pension plans, individual retirement saving accounts, etc.) UK has tendency to reform programme, frequently: Major reforms: 1975, 1986, 1995, 2000, 2004, 2007 Frequency increasing from every 10 years to every 3 years! First lesson for Canada reforms too frequent to permit proper evaluation (ex ante and ex post).

3 This paper. Focus on two aspects of 2007 UK reforms which may be of particular interest in Canada: Reform of multi-tiered social security programme: implications for future generations of pensioners Reform of private pension provision: Introduction of new Personal Accounts Illustrate change in default option

4 A time line in UK pensions/social security history Beveridge: 1911/1948: A universal minimum; state should not be responsible for income replacement beyond minimum 1970s: state should provide income replacement if private sector would not (SERPS/ contracting out ) Thatcher: 1980s: Reduce future costs to state, privatise by extending contracting out Blair/Brown: People not saving enough (Blair); tax credits rather than universality (Brown) Pension Commission : semi-compulsion to increase saving; tax credits reduce incentives, restore universality (but topped up by private saving) May 2007 legislation (social security changes) + proposed legislation on personal accounts

5 Social Security: Parallel structures? Canada Old Age Security Flat benefit, withdrawn at high incomes CPP/QPP Earnings-related, accruals up to max. ceiling Guaranteed Income Supplement For low income households; tapered at 25%/50% United Kingdom Basic State Pension withdrawal, indexed below income-tested benefits SERPS/Second State Pension (S2P) SERPS similar to CPP; S2P explicitly flat benefit in long run Pensioner Credit/Saving Credit Originally tapered at 100%; now reduced to 40%

6 Principal 2007 reforms to UK social security programme Background Basic State Pension has usually been indexed in payment to inflation since 1980 Whereas income-tested benefits had been indexed to earnings since reforms Basic State Pension is to be earnings indexed from (probably) 2012 Some of these gains will be clawed back from higher earners through cuts to maximum State Second Pension Maximum means-tested support from income-tested programme (Pension Credit) to be reduced

7 Man at 20 th percentile of earnings distribution After 2007 reform Before 2007 reform Means-tested Pension Credit Means-tested Pension Credit Second tier pension 0.5 Second tier pension 0.5 Basic State Pension Basic State Pension Percentag e of ag e 50 earning s 0.0 Percentag e of ag e 50 earning s Year reach State Pension Age Year reach State Pension Age

8 Man at 50 th percentile of earnings distribution Before 2007 reform After 2007 reform Means-tested Pension Credit Means-tested Pension Credit Second tier pension 0.5 Second tier pension 0.5 Basic State Pension Basic State Pension Percentag e of ag e 50 earning s 0.0 Percentag e of ag e 50 earning s Year reach State Pension Age Year reach State Pension Age

9 Man at 80 th percentile of earnings distribution Before 2007 reform After 2007 reform Means-tested Pension Credit Means-tested Pension Credit Second tier pension 0.5 Second tier pension 0.5 Basic State Pension Basic State Pension Percentag e of ag e 50 earning s 0.0 Percentag e of ag e 50 earning s Year reach State Pension Age Year reach State Pension Age

10 Background: Saving for retirement in the UK: The new Personal Account proposals Shift from DB to DC pension plans DB plans increasingly public sector-dominated Decline in overall pension saving Fall in coverage, low growth in total saving in early 2000s Benchmark of saving adequacy c.25% not saving enough Failure of 2000 reform to increase number of retirement savers (And it s asserted that) people don t respond to incentives: choice paralysis, high discount rates etc; So government will pick up tab in future through S2P and income-tested benefits

11 Some evidence. Pension plan coverage stagnating in early 2000s Pension coverage by type of pension: to Employees only Year Increase % % % % % point Type of pension: Personal Pension Stakeholder pension Employer pension plan Combined Aggregate coverage (%) Sample size 19,549 18,711 20,418 21,648 80,326 Source: Family Resources Survey data. From Disney, Emmerson & Wakefield: Tax reform and retirement saving incentives: Evidence from the introduction of Stakeholder Pensions in the UK Institute for Fiscal Studies (IFS)

12 Defined benefit (DB) plans are now predominantly public sector DB pension coverage by age, sector, sex, education level, 2001 % covered Age Age All Public Private All Public Private All Public Private All All Men Women Education High Mid Low Source: British Household Panel Survey data From: Disney, Emmerson &, Tetlow: What is a public pension sector pension worth? IFS Working Paper W17/07

13 Employer provision of pensions From employer provision survey data: Only 6% of employers have a DB pension plan Among employers with more than 1000 workers, 74% have plans, among those , 51% But proportion of employers with open DB plans (to new members) halved between 2003 and Employers who make any kind of provision for employee pensions (DB/DC plan, group Personal Pension, contribution to individual s Personal Pension) rose from 29% to 52% , fell to 44% in 2005.

14 How the UK choice-based system works. People have a choice of pension plan: Publicly provided v. private Employer-provided v. individual saving account The incentives associated with choices are complex: Disney, Emmerson & Wakefield exploit policy changes to argue people don t do too badly in choosing the right option. But, maybe default options matter And, if private retirement saving is too low.. Change the default saving options

15 Does employer offer a pension plan? Join employer s pension plan? Stakeholder Pension offered thru employer? (since 2001) Make additional contributions (AVCs)? Contract in to public program (SERPS ) S2P (2002- ) Contributions rebate paid into Personal Pension (1988- ) Make additional contributions? Second tier pension choice in UK if employer offers a pension plan

16 Does employer offer a pension plan? Join employer s pension plan? Stakeholder Pension offered thru employer? (since 2001) Make additional contributions (AVCs)? Contract in to public program (SERPS ) S2P (2002- ) Contributions rebate paid into Personal Pension (1988- ) Make additional contributions? Second tier pension choice in UK if employer offers a pension plan default option

17 Does employer offer a pension plan? Join employer s pension plan? Join Stakeholder Pension offered thru employer? (since 2001) Make additional contributions (AVCs)? Contract in to public program (SERPS ) S2P (2002- ) Contributions rebate paid into Personal Pension (1988- ) Make additional contributions? Second tier pension choice in UK if employerdoes not offer a pension plan

18 Does employer offer a pension plan? Join employer s pension plan? Join Stakeholder Pension offered thru employer? (since 2001) Make additional contributions (AVCs)? Contract in to public program (SERPS ) S2P (2002- ) Contributions rebate paid into Personal Pension (1988- ) Make additional contributions? Second tier pension choice in UK if employer does not offer a pension plan default option

19 The new personal accounts I New proposal enrols employees in Personal Accounts, from Individuals will be enrolled if they earn > 5000 per year, aged 22 to SPA. They pay 4% of earnings from 5000 pa to ceiling of pa (above minimum contribution). Also, employer contributes 3%, government 1% total contribution = 8%.

20 The new personal accounts II If work for employer who is compliant, then exempt from new Personal Accounts. Exemption arises if: Offers as a default a final salary DB plan of a certain minimum standard Offers as a default a DC plan that contributes at least 8% (of which employer offers at least 3%) (and possibly a management charge test) Other types of plans e.g. existing group personal pensions?? If employer is non-compliant, employee is autoenrolled into Personal Accounts (the default option ) he/she can choose to withdraw. Re-enrolled every 3 years unless another compliant arrangement. Contracting-out limited to compliant employers.

21 Does employer offer a compliant pension plan? Join employer s pension plan? Make additional contributions (AVCs)? Join public program S2P (2002- ) Employee autoenrolled in personal account Employee chooses to opt out? Contributions paid into Personal/Stakeholder Pension Do nothing Second tier pension choice in UK after 2007 if employer offers an exempt ( compliant ) pension plan (DB or DC)

22 Does employer offer a compliant pension plan? Join employer s pension plan? Make additional contributions (AVCs)? Join public program S2P (2002- ) Employee autoenrolled in personal account Employee chooses to opt out? Contributions paid into Personal/Stakeholder Pension Do nothing Second tier pension choice in UK after 2007 if employerdoes not offer an exempt' pension plan

23 Does employer offer a compliant pension plan? Join employer s pension plan? Join public program S2P (2002- ) Employee autoenrolled in personal account Re-enrol every 3 years Make additional contributions (AVCs)? Employee chooses to opt out? Contributions paid into Personal/Stakeholder Pension Do nothing Second tier pension choice in UK after 2007 if employerdoes not offer an exempt' pension plan

24 Evaluation of new proposals: I Many details have yet to be worked out (and not just fine print!) before start in DWP estimates personal accounts could have between 6 and 10 million members with private pension saving of around 8 billion a year of which approx. 60% will be new saving. NIESR calibration based on BHPS data of a compulsory retirement saving model suggests big effect on retirement saving, but also substitution (e.g. of investment in equity markets) If 8% contribution becomes new benchmark for saving, will more generous pension plans then reduce their contribution rates? Most tests of default option are experiment-based but this is a noisy experiment with 3 changes: Change in default option 3% employer contribution for non-compliant employers (previously often 0%?) Associated changes to social security

25 Evaluation of new proposals: II Investment strategy for Personal Accounts also under review DWP acts as clearing house for contributions, not as investor. Seems likely Personal Account holders given a (limited) choice of (private) plans and providers some niche plans (e.g. green investments) & a generic plan. Experiments are being funded by DWP to determine optimum number of plan types (fund allocations).

26 Conclusion: are there lessons from UK? UK programme has been successful in keeping public expenditure on pensions under control given demographic ageing. But saving adequacy an increasing concern Basic structure similar to Canada 3 tiers of public provision + both DB and DC provision by private sector Too much tinkering in UK bad for stable planning or proper evaluation 2007 reform has more ex ante analysis than 2000/2003 reforms Integration of different parts of programme e.g. consistent indexation of benefit Canada better in this respect (but indexation only to prices what affect on relative incomes?)